Tuesday, March 25, 2014

University of Illinois economist Jeffrey Brown, a former member of the Social Security Advisory Board, writes for Forbes that proposals to raise Social Security benefits without fixing the program’s finances could make America’s retirees worse rather than better off.

CSIS, First Floor 1616 Rhode Island Avenue, Washington, DC 20036The Center for Strategic and International Studies invites you to join us for a discussion of the global state of the art in retirement policy and pension system reform. The occasion is the release of Lessons from Abroad for the U.S. Entitlement Debate, a new CSIS report that puts the U.S. aging challenge in international perspective, reviews the most promising retirement reform initiatives in other developed countries, and draws lessons for U.S. policymakers.

Please RSVP by clicking here.Note: You must log on to your CSIS account to register. If you do not have an account with CSIS you will need to create one. If you have any difficulties, or do not receive “password reset emails” please contact imisadmin@csis.org

We investigate whether households adjust retirement savings decisions in response to changes in the means-tested public pension plans. The policy in question lowered the taper rate of the assets test on the age pension in Australia in 2007. We use HILDA, a detailed micro panel data-set for Australian households and focus on the age group between 50 and 64 in 2006, prior to the reform. We compare savings behaviours of those who were constrained to increase financial wealth because of the assets test prior to the reform with those who were not constrained, and find that assets tests do have a perverse impact on saving.

Individuals’ planned retirement age is affected by a trade-off between financial costs (a feasibility oriented consideration) and the number of years in retirement (a desirability oriented consideration). Previous research shows that construal level interventions (i.e., activating a global vs. local mindset with individuals) affect the relative importance of these two types of decision aspects such that primary considerations become more important under a global mindset compared to secondary considerations. In this research we predict that this results in an age-related reversal of the effect of a construal level induced global mindset on planned retirement age. The reason is that as individuals’ chronic temporal distance to retirement decreases (i.e., they become older) their primary retirement goals are likely to change. Younger individuals are temporally distant from retirement and primarily driven by desirability goals, while older individuals are temporally close to retirement and driven by feasibility goals. Therefore, since a global construal level intervention increases the impact of individuals’ primary goals, we predict that such an intervention decreases planned retirement age for the younger age group but increases it for the older age group. Results from two online surveys confirm this predicted decision process. They show first that indeed younger individuals are more likely than older individuals to plan for a retirement age that they cannot afford. Second, the results demonstrate that a construal level intervention-induced global mindset increases the impact of desirability considerations on planned retirement age for younger individuals (and lowers planned retirement age), but that it increases the impact of feasibility considerations for older individuals (and increases planned retirement age). Jointly, these findings underline the importance of taking into account both individuals’ chronic and situationally-induced mental construals of the planned retirement decision when designing policy communications to promote individuals’ retirement at a later age.

This paper quantifies the welfare implications of the U.S. Social Security program during the Great Recession. We find that the average welfare losses due to the Great Recession for agents alive at the time of the shock are notably smaller in an economy with Social Security relative to an economy without a Social Security program. Moreover, Social Security is particularly effective at mitigating the welfare losses for agents who are poorer, less productive, or older at the time of the shock. Importantly, in addition to mitigating the welfare losses for these potentially more vulnerable agents, we do not find any specific age, income, wealth or ability group for which Social Security substantially exacerbates the welfare consequences of the Great Recession. Taken as a whole, our results indicate that the U.S. Social Security program is particularly effective at providing insurance against business cycle episodes like the Great Recession.

The authors use data from the 2008 panel of the Survey of Income and Program Participation (SIPP) matched to administrative records from the Social Security Administration (SSA) to produce tables describing the characteristics of Disability Insurance (DI) beneficiaries and Supplemental Security Income (SSI) recipients in December 2010. This match to survey data allows the authors to provide detailed information on the economic and demographic characteristics of program participants not available in administrative records. These tables update those previously published by DeCesaro and Hemmeter (2008) using 2002 data.

Retirement distribution planning helps ensure the quality of life of retirees with all types of uncertainty. Probability of successfully funding through retirement has been a widely studied topic (Bengen, 1994; Ameriks et. al, 2001; Finke et. al, 2011; Pfau, 2012). However these studies treat the whole household only as one agent (Hubener et. al, 2013). And also, these literatures usually assume a 30 year planning horizon. For financial planning industry, some of the clients are couples and some of them outlive the 30 years planning horizon. So there is a need to study retirement for married retirees and set planning horizon conditional on their real mortality risk. This paper adds to the current literature by constructing a simulation framework incorporating conditional mortality risk and evaluating the distribution of outcomes. Within this framework, all types of strategies can be evaluated with different objective functions (such as maximizing the probability of success within the specified planning horizon, maximizing annual consumption, and maximizing expected total utility during retirement), different consumption pattern (fixed versus variable). Within the context of married couples, the joint mortality risks results in totally different retirement distribution outcomes, compared with the ones suggested by the previous studies.

Thursday, March 6, 2014

A new Michigan Retirement Research Center Working Paper is available. View the Abstract and Key Findings below.

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The Assets and Liabilities of Cohorts: The Antecedents of Retirement Security (WP 2013-296)

by J. Michael Collins, John Karl Scholz and Ananth Seshadri

Abstract:

This paper uses repeated cross-sectional data from the Surveys of Consumer Finances (SCF) to characterize cohort patterns of net worth and debt of American households. Cohort patterns provide a useful benchmark for identifying potentially vulnerable households based on relative financial positions over time at similar ages. We also summarize attitudinal measures thought to be related financial capability. Both sets of descriptive data are useful in assessing the well-being of households over the life course and ultimately preparation for retirement. We find a striking rise in debt across cohorts over time, relative to total assets and relative to income, although debt-holding declines with age as is expected. Debt is dominated by mortgages, particularly for more recent cohorts relative to similar aged cohorts 15 year prior. Tabulations of age cohorts by race or education level show predictable similar patterns. An analysis of panel data using the 2007-2009 SCF provides some support for the idea that older households lost more during the recession, as did minorities and people of higher levels of net worth. While primarily descriptive in nature, the stylized facts presented in this paper are suggestive of the trajectory for households moving into retirement age over the next decade. We do not find substantial evidence of more recent generations falling behind, nor major shifts in attitudes towards risk taking or other attitudes that might be reasonably correlated with asset or debt levels.

Key Findings:

* Households with a head born 1929-1943 (age 67-81 by 2010) and then those born in 1944-1958 (age 52-66 by 2010) had similar wealth levels at the same age/life stages. The younger group does not appear to be falling behind.

* Households born from 1929-1943 had higher mean and median total debt at every age/life stage relative to those born 1944-1958. Debt is mainly driven by mortgages.

* Growing debt levels for more recent cohorts of households have not resulted in lowered net worth, however.

* Education remains a strong predictor of net wealth status with and schooling after high school associated with 4-5 times the net worth of households with high school or less education.

* Minorities have few financial assets and their wealth is concentrated in non-financial assets such as housing.

Wednesday, March 5, 2014

My AEI colleague Phil Swagel, with whom I also had the pleasure to work during the Bush administration, writes in the New York Times on how to think about Social Security reform – and the opportunities President Obama may be missing in putting reform on the back burner. Check it out here.

About me

I am a Resident Scholar at the American Enterprise Institute in Washington, where my work focuses on Social Security policy. Previously I held several positions within the Social Security Administration, including Deputy Commissioner for Policy and principal Deputy Commissioner. Prior to that I was a Social Security Analyst at the Cato Institute. In 2005 I worked on Social Security reform at the White House National Economic Council, and in 2001 I was on the staff of the President's Commission to Strengthen Social Security. My Bachelor's degree is from the Queen's University of Belfast, Northern Ireland. I have Master's degrees from Cambridge University and the University of London and a Ph.D. from the London School of Economics and Political Science. I can be contacted at andrew.biggs @ aei.org.